Our company has certain securities for which interest accrued and became due on 30th June and 31st December of every year. We admitted the interest as income when it accrued and became due. At the time of assessment, the AO added interest for the period from January 1 to March 31 by stating that as per the accrual system of accounting such interest which has accrued is taxable. Is he correct?
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Interest could accrue on day to day basis but it would become due only when the right to enforce payment is obtained. In your case, the interest accrued became due on 30th June and 31st December. Though the accounting year ends on 31st March, the interest accrued is not due on that date for the broken period i.e. from 1st January to 31st March. Therefore, the interest accrued but not due is not chargeable to tax. You may refer to CIT v. FAL Industries Ltd (2009) 314 ITR 47 (Mad).
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